This is the third of six articles in which we cover how to create a budget. The previous post, Gather Data for Your Budget covered what information you’ll need to have on hand, and now we’ll show you how to use the data.
Ok, so you’ve been good and gathered a couple months of data; now let’s use that to get the 12-month picture we explained before.
Check out the Tools section; you’ll notice we’re using Excel (i.e. a type of spreadsheet) to do this budget. Do you have to? Nope. You can do this with a calculator, pen, and paper, but it’s just more work. Excel is designed for this stuff, so we strongly suggest using some sort of spreadsheet. Please don’t think you need to buy Excel. There are many free spreadsheets around – try Google Sheets.
Note: To see the row # and column letter, you can either download or open the spreadsheet in a new window by scrolling the page to the bottom where you’ll see a thin black bar. Click the last icon on the right. If you hover over it, it will say, “View full-size workbook”.
Of course you could design what works best for you, but this generic version should be good enough for most people to get started.
Alternatively, email us for help.
What You Earn
These are the income rows, which are usually the easiest to complete. Most of us don’t have many sources of income! In many cases it’s only the salary we are paid.
You can start either with your gross income and then deduct the amounts the government takes from us (taxes, NIS, etc). If this is too complicated, then just enter your net take home pay in row 8. What about other salary deductions e.g. loan payments and automatic savings? They need to go into the relevant section: loan payments are entered in row 24-27 and automatic savings deductions are entered in rows 116-120. Read on; this will make more sense soon.
If you have investments, do NOT include the interest or dividend income. We’ll talk more about this in the next section.
A tricky one is bonuses. Some of us receive a performance bonus, probably once a year (we think Christmas bonuses have all but disappeared!). So what do you do with that? Our suggestion is do nothing – leave it out of the budget. Again, we’ll talk more about this in the next section.
But we need to differentiate between a once-a-year performance bonus and sales-driven commissions, which are paid fairly regularly. These regular payments have to be included because they are like salaries, just more variable.
You’ll notice a few rows for Other income. This could be anything like a second job, etc. If you are doing a combined budget with a spouse, you can use rows 13-15 to enter your spouse’s salary information.
What You Spend: Fixed
Next, the tougher stuff: what we spend! As explained in “Gather Data for Your Budget”, a detailed analysis for at least 2 or 3 months is essential.
The first section deals with what we describe as fixed payments. And we don’t mean only loan payments. We mean ANY payment that does not vary often. Basically, the principle is once the decision is made to take on the expense, you do not have the ability to reduce it easily.
Some people argue that we should include food costs because you have to spend money on food. We agree with this statement generally, but food costs could have a significant discretionary element i.e. it can always be less. So unless you’ve reached biscuit and water for 3 meals a day, we prefer to exclude it from the “fixed” list.
This one is fairly straightforward. Enter your monthly loan payments. A sidebar about credit cards. If you have a credit card running balance (meaning you do not pay off your credit card balance in full each month), that’s PROBLEMO NUMERO UNO. We’ll deal with that matter later on.
We’ve shown you a few examples of other fixed payments. Notice we’ve included utilities. These have a degree of variability (e.g. electricity) but usually not a lot. Also included are protection payments for insurance (e.g. life and health). Once you are committed to insurance, it’s really like another loan payment if you think about it.
What You Spend: Discretionary
First up, personal expenses.
Think hard. Any type of expense that relates to you e.g. going out, clothes, lotto, anything. You’ll be surprised at how this adds up.
Expenses like vacations are tricky. It could create a large deficit if you put the cost in one month. We think the better approach is: (a) to decide if you want a vacation every year or every two years, etc; (b) prepare an estimate of the total cost; (c) divide this cost over the time period you just chose i.e. 12 months, 24 months, etc; (d) put this monthly amount in your budget. This way you are building a pool of cash over time to meet that particular expense (just remember to actually put away the money each month!).
Next, many of us have to contribute to family expenses e.g. paying a bill(s) or just providing an allowance to parents, etc.
Next, Meals, which consists of both groceries and buying food.
Car expenses. Most people only focus on gas, but if you have an older vehicle, you bet you’ll have some sort of maintenance (when is your next tyre change due?). Even if you have a new vehicle, you’ll likely have a scheduled dealer maintenance.
Bank charges/fees are self-explanatory. Professional expenses or school fees are captured here as well. Medical is also self-explanatory.
Last, children. Many people try to think these costs are included in groceries, etc. But kids have a whole other layer of costs (loving them ain’t cheap, right?) e.g. clothes, shoes, school supplies, camps, toys, casual reading, etc. There’s a whole lot of stuff that can just suck up cash.
Ok, you’re done with the “hard stuff”. Now you get to sit down, breathe deeply, and peep at column N row 113, Income less Expenses. This shows how much money you have left over after deducting living expenses from your income.
You’ll probably collapse with shock – yeah, we told you to sit down. There’s not much left, or it could be negative, meaning you’re expecting to spend more than you make. Take a drink, beer, wine, whatever you choose. Enjoy it. You may want to cut it out for a while to save money!
But what you need to know, is for now, that’s ok. Because step one is just coming to terms with what you actually do and the position you are actually in.
You’ll probably notice rows 116-120, which is called “Allocated Savings”. Here is where you’ll enter the various automatic deductions or other amounts that you designate to save. It’s not really necessary but you may find it useful. You’ll notice row 118 Life Insurance seems like a repeat of row 46. But some life insurance products have a protection element and investment element. If you can split your premium, you should put the protection portion in row 46 and the savings/investment portion in row 118.
The most important thing is getting to row 113 Income less Expenses. The method you use to to allocate these funds or where you choose to send it to save is much less important.
Ready to go? Then read on to the next article in this series, Creating Your Budget (33/33/33).
Have you tried using our sample budget spreadsheet yet? We’d love to hear about your thoughts or experiences in the comments below!